Basel Committee
on Banking Supervision
Frequently asked
questions on the revised
Pillar 3 disclosure
requirements
August 2016
This publication is available on the BIS website (www.bis.org).
©
Bank for International Settlements 2016. All rights reserved. Brief excerpts may be reproduced or
translated provided the source is stated.
ISBN 978-92-9197-620-1 (print)
ISBN 978-92-9197-621-8 (online)
Contents
Overview of risk management and RWA ................................................................................................................................. 1
Linkages between financial statements and regulatory exposures ............................................................................... 1
Credit risk.............................................................................................................................................................................................. 5
Counterparty credit risk ................................................................................................................................................................ 10
Securitisation ..................................................................................................................................................................................... 12
Market risk ......................................................................................................................................................................................... 13
Frequently asked questions on the revised Pillar 3 requirements
iii
Overview of risk management and RWA
Template OV1: Overview of RWA
Question 1: For counterparty credit risk (CCR) (rows 4–6), the split requested is by the exposure at
default (EAD) methodology classification used to determine exposure levels rather than the riskweighted asset (RWA) methodology classification used to determine risk weights. This contradicts the
presentation for credit risk (rows 1–3) and securitisation (rows 12–15). Should line items be added (where
necessary) to reconcile the disclosure to the total RWA?
Answer: Template OV1 does not request CCR to be split by risk weighting methodology, but by EAD
methodology. Nevertheless, banks should add extra rows, as appropriate, to split the exposures by risk
weighting methodology, 1 in order to facilitate the reconciliation with the RWA changes in Template
CCR7.
Linkages between financial statements and regulatory exposures
Template LI1: Differences between accounting and regulatory scopes of consolidation
and mapping of financial statements categories with regulatory risk categories
Template LI2: Main sources of differences between regulatory exposure amounts and
carrying values in financial statements
Question 2: Further guidance is required for Template LI1. In particular:
(a)
In what situations would the statement “the sum of amounts in columns (c) to (g) may not
equal the amounts in column (b)” apply?
(b)
Are assets deducted from regulatory capital in accordance with Basel III (eg goodwill and
intangible assets) disclosed in column (g)?
(c)
Are exposures required to be 1,250% risk-weighted to be disclosed in column (g)?
(d)
Considering that the risk weighting framework bears on assets rather than liabilities, should all
the liabilities be disclosed in column (g)? Should in any case deferred tax liabilities and defined
benefit pension fund liabilities be included in column (g)?
Answer:
(a)
The definitions accompanying Template LI1 state that “where a single item attracts capital
charges according to more than one risk category framework, it should be reported in all columns that
attract a capital charge”. For example, derivative assets/liabilities held in the regulatory trading book may
relate to both column (d) and column (f). In such circumstances, the sum of the values in columns (c)–(g)
would not equal to that in column (b). When amounts disclosed in two or more different columns are
1
RWA and capital requirements under the Standardised Approach for credit risk weighting are to be subdivided in the
standardised approach for counterparty credit risk (SA-CCR) and the internal models method (IMM), and the same for RWA
and capital requirements under the IRB approach for credit risk weighting.
Frequently asked questions on the revised Pillar 3 requirements
1
material and result in a difference between column (b) and the sum of columns (c)–(g), the reasons for
this difference should be explained by banks in the accompanying narrative.
(b)
Elements which are deducted from a bank’s regulatory capital (eg goodwill and intangible
assets and deferred tax assets) should be included in column (g), taking into consideration the different
thresholds that apply where relevant. Assets should be disclosed for the amount that is actually
deducted from capital. Some examples are shown below:
•
Goodwill and intangible assets: the amount to be disclosed in column (g) is the amount of any
goodwill or intangibles, 2 including any goodwill included in the valuation of significant
investments in the capital of banking, financial and insurance entities that are outside the scope
of regulatory consolidation. The amount disclosed in the assets rows is net of any associated
deferred tax liability which would be extinguished if the intangible assets become impaired or
derecognised under the relevant accounting standards. The associated deferred tax liability is
also to be disclosed in the liabilities rows of column (g).
•
Deferred tax assets: for all types of deferred tax assets to be deducted from own funds, the
amount to be disclosed in column (g) is net of associated deferred tax liabilities that are eligible
for netting. The associated deferred tax liabilities are to be disclosed in the liabilities rows of
column (g). For deferred tax assets, for which the deduction is subject to a threshold, the
amount disclosed in column (g) in the assets rows is the amount, net of any eligible deferred
tax liability, above the threshold. The associated deferred tax liabilities are also to be disclosed
in the liabilities rows of column (g).
•
Defined benefit pension fund assets: the amount disclosed is net of any deferred tax liabilities
which would be extinguished if the asset should become impaired or derecognised under the
relevant accounting standards. These deferred tax liabilities are also to be disclosed in the
liabilities rows of column (g).
•
Investments in own shares (treasury stock) or own instruments of regulatory capital: when
investments in own shares or own instruments of regulatory capital are not already
derecognised under the relevant accounting standards, the deducted amount disclosed is net
of short positions in the same underlying exposure or in the same underlying index allowed to
be netted under the Basel framework. These short positions are also to be disclosed in the
liabilities rows of column (g).
(c)
1,250% risk-weighted exposures should be disclosed in the relevant credit risk or securitisation
risk templates.
(d)
The liabilities disclosed in column (g) are all liabilities under the regulatory scope of
consolidation, except for the following, which are disclosed in columns (c), (d), (e) and (f) as applicable:
•
Liabilities that are included in the determination of the exposure values in the market risk or the
counterparty credit risk framework.
•
Liabilities that are eligible for the Basel netting rules. 3
2
Under paragraph 68 of the Basel III framework, subject to supervisory approval, banks that report under local GAAP may use
the IFRS definition of intangible assets to determine which assets are classified as intangible and are thus required to be
deducted.
3
The applicable netting rules under the Basel framework include:
•
2
credit risk SA: paragraphs 109, 117, 118, 139, 188;
Frequently asked questions for revised Pillar 3 framework
Question 3: What is the relationship between Template LI1 and Template LI2?
(a)
Is column (g) in Template LI1 included in column (a) of Template LI2?
(b)
What are the assets and liabilities to be disclosed in rows 1 and 2 of column (a) in Template LI2?
(c)
Does Template LI2, row 3 (total net amount under regulatory scope of consolidation) represent
the difference between the entries in row 1 (asset carrying value amount under scope of
regulatory consolidation) and row 2 (liabilities carrying value amount under regulatory scope of
consolidation)?
Answer:
(a)
Template LI2 is focused on assets in the regulatory scope of consolidation that are subject to the
regulatory framework. Therefore, column (g) in Template LI1, which includes the elements of the
balance sheet that are not subject to the regulatory framework, is not included in Template LI2.
The following linkage holds: column (a) in LI2 = column (b) in LI1 – column (g) in LI1.
(b)
Row 1 of Template LI2 includes only assets that are risk-weighted under the Basel framework,
while row 2 includes liabilities that are considered for the application of the risk weighting
requirements, either as short positions, trading or derivative liabilities, or through the application
of the netting rules to calculate the net position of assets to be risk-weighted. These liabilities
are not included in column (g) in Template LI1 (see question 2(d)). Assets that are risk-weighted
under the Basel framework include assets that are not deducted from capital because they are
under the applicable thresholds or due to the netting with liabilities.
(c)
Row 3 = row 1 – row 2.
Question 4: In Template LI2, is column (a) the sum of columns (b) to (e)?
Answer: Column (a) is not necessarily equal to the sum of columns (b) to (e) due to assets being riskweighted more than once (see question 2(a)).
In addition, exposure values used for risk weighting may differ under each risk framework depending on
whether standardised approaches or internal models are used in the computation of this exposure value.
Therefore, for any type of risk framework, the exposure values under different regulatory approaches can
be presented separately in each of the columns if a separate presentation eases the reconciliation of the
exposure values for banks.
Question 5: What is the difference between the required disclosure in row 2 (liabilities carrying value
amount under regulatory scope of consolidation) and row 6 (differences due to different netting rules,
other than those already included in row 2).
Answer: Row 2 refers to balance sheet netting, while row 6 refers to incremental netting in application
of the Basel rules (when not already covered by the balance sheet netting). The netting rules under the
Basel framework are different from the rules under the applicable accounting frameworks.
•
•
•
•
credit risk IRB: paragraphs 173, 174, 293, 299, 309, 335, 345, 353, 474;
counterparty credit risk: credit risk rules plus Annex IV paragraphs 10–19, paragraph 89 and paragraphs 96(i)–(iii);
securitisation: paragraph 583; and
market risk: paragraphs 709(ii) and (iii), and 718(i),(xiii),(xiv),(xv),(xx),(xxxii),(xLvii) and (xLii).
Frequently asked questions on the revised Pillar 3 requirements
3
The incremental netting in row 6 could represent an additional deduction from the net exposure value
before application of the Basel netting rules (when those rules lead to more netting than the balance
sheet netting in row 2) or a gross-up of the net exposure value when the off-balance sheet netting
operated in row 2 is broader than what the Basel netting rules allow.
Question 6: How does the disclosure in Template LI2, in particular row 3 (total net amount under
regulatory scope of consolidated) relate to accounting equity?
Answer: The netting between assets and liabilities in Template LI2 does not lead to accounting equity
under a regulatory scope of consolidation being disclosed in row 3. Assets and liabilities included in rows
1 and 2 are limited to those assets and liabilities that are taken into consideration in the regulatory
framework. Other assets and liabilities not considered in the regulatory framework are to be disclosed in
column (g) in Template LI1 and are consequently excluded from rows 1 and 2 of Template LI2 (see
question 3).
Question 7: For Template LI2, what is row 7 (differences due to consideration of provisions) meant to
be? Is this meant to include the entire allowance under the advanced internal rating-s based (A-IRB)
approach?
Answer: The exposure values under row 1 are the carrying amounts and hence net of provisions. 4
Nevertheless, exposures under the foundation internal ratings-based (F-IRB) and A-IRB approaches are
risk-weighted gross of provisions. Row 7 therefore is the re-inclusion of general and specific provisions
in the carrying amount of exposures in the F-IRB and A-IRB approaches so that the carrying amount of
those exposures is reconciled with their regulatory exposure value. Row 7 may also include the elements
qualifying as general provisions that may have been deducted from the carrying amount of exposures
under the Standardised Approach and that therefore need to be reintegrated in the regulatory exposure
value of those exposures. Any differences between the accounting impairment and the regulatory
provisions under the Basel framework that have an impact on the exposure amounts considered for
regulatory purposes should also be included in row 7.
Question 8: For Template LI2, how would the entry in row 10 (exposure amounts considered for
regulatory purpose) differ from the balance sheet values under a regulatory scope of consolidation? Is it
correct that there would be no differences to be explained, given that market risk does not have
exposure values and the linkage for the other risk categories does not apply?
Answer: In general, under a regulatory scope of consolidation, the accounting carrying amount and the
regulatory exposure value would vary due to the incidence of off-balance sheet elements, provisions,
and different netting and measurement rules.
Under market risk, the regulatory exposure value will also differ from the accounting carrying amount.
Differences could be due to off-balance sheet items, netting rules and different measurement rules of
market risk positions via prudent valuation (as opposed to fair valuation in the applicable accounting
framework).
4
4
“Provisions” refer to “specific provisions” and “general provisions” set out in paragraph 60 of the Basel III framework.
Frequently asked questions for revised Pillar 3 framework
Credit risk
Template CR1: Credit quality of assets
Question 9: Do “debt securities” include equity investments subject to the credit risk framework?
Answer: No. However, banks may add a row between rows 2 and 3 for “other investment” (if needed)
and explain in the accompanying narrative.
Question 10: The definition of “default” which is used in Templates CR1 and CR2 exists only in the IRB
framework. How should banks using the standardised approach for credit risk interpret “default” in the
SA-CR framework?
Answer: For a bank using the standardised approach for credit risk, the default exposures in Templates
CR1 and CR2 should correspond to the secured and unsecured portions of claims “past due for more
than 90 days”, as stated in paragraph 75 of the Basel II text.
Question 11: The validation rule reads "[CR1:1/d] = [CR3:1/a] + [CR3:1/b]". The interpretation based on
the validation rule is that the gross carrying value after allowances/impairments for loans [CR1:1/d]
should equal the carrying values of unsecured exposures [CR3:1/a] and the carrying values of exposures
secured by collateral [CR 3:1/b]. Should exposures secured by financial guarantees [CR3:1/d] and/or
credit derivatives [CR3:1/f] be included within the equation?
The same issue applies for the validation rule which reads “[CR1:2/d] = [CR3:2/a] + [CR3:2/b]”.
Answer: The validation rules are correct when there are no exposures secured by guarantees and/or
credit derivatives. However, in cases where there are exposures secured by guarantees and/or credit
derivatives, the validation rules to be applied (with reference to the revised columns for Template CR3 in
Question 15) are:
[CR1: 1/d] = [CR3: 1/a] + [CR3:1/b1], where [CR3:1/b1] = [CR3:1/b] + [CR3:1/d] + [CR3:1/f]; and
[CR1: 2/d] = [CR3: 2/a] + [CR3:2/b1], where [CR3:2/b1] = [CR3:2/b] + [CR3:2/d] + CR3:2/f].
Question 12: Template CR1 includes off-balance sheet exposures while Template CR2 does not.
Accordingly, [CR1:4/a] does not always equal to [CR2:6/a], as set out in the linkages in the template.
Does the formula only work when there is zero defaulted off-balance sheet exposure?
Answer: National supervisors have discretion to decide whether off-balance sheet exposures should be
included in Template CR2. Banks should disclose in their accompanying narrative whether defaulted
exposures include off-balance sheet items.
Template CRB: Additional disclosures related to the credit quality of assets
Question 13: What is the definition of “restructured exposures” in the context of the disclosures?
Answer: Banks should disclose the definition of restructured exposures they use (which may be a
definition from the local accounting or regulatory framework).
Frequently asked questions on the revised Pillar 3 requirements
5
Template CRC: Qualitative disclosure requirements related to credit risk mitigation
techniques
Question 14: Considering confidentiality issues, to what extent is credit derivative provider information
required in row (c)?
Answer: In the application of paragraph 11 on proprietary and confidential information, a bank does not
need to disclose specific items that lead to disclosures of confidential or proprietary information, but
must disclose more general information about the subject matter of the requirement instead. A bank
must also explain in the narrative commentary to the disclosure the specific items which have not been
disclosed and the reasons.
Accordingly, banks should disclose a meaningful breakdown of their credit derivative providers, and set
the level of granularity of this breakdown in accordance with Principle 11. For instance, banks are not
required to identify their derivative counterparties nominally if the name of the counterparty is
considered to be confidential information. Instead, the credit derivative exposure can be broken down
by rating class or by type of counterparty (eg banks, other financial institutions, non-financial
institutions).
Template CR3: Credit risk mitigation techniques – overview
Question 15: How should the disclosure be made, in an example where a loan has multiple types of
credit risk mitigation and is over-collateralised (eg a loan of 100 with land collateral of 120 as well as
guarantees of 50)?
Answer: When an exposure benefits from multiple types of credit risk mitigation mechanisms, the
exposure value should be allocated to each mechanism by order of priority based on the credit risk
mitigation mechanism which banks would apply in the event of loss. Disclosure should be limited to the
value of the exposure (ie the amount of over-collateralisation does not need to be disclosed in the
table). If the bank wishes to disclose information regarding the over-collateralisation, it may do so in the
accompanying narrative.
The following scenarios illustrate how Template CR3 should be completed (note: the illustration assumes
the replacement of columns (c), (e) and (g) by a new column – refer to question 11).
6
Frequently asked questions for revised Pillar 3 framework
a
New column
(b1)
b
d
f
Unsecured
exposures:
carrying
amount
Exposures to
be secured
Exposures
secured by
collateral
Exposures
secured by
financial
guarantees
Exposures
secured by
credit
derivatives
One secured loan of 100 with
collateral of 120 (after haircut)
and guarantees of 50 (after
(i)
0
100
50
50
0
haircut), if bank expects that
guarantee would be
extinguished first
One secured loan of 100 with
collateral of 120 (after haircut)
and guarantees of 50 (after
(ii)
0
100
100
0
0
haircut), if bank expects that
collateral would be extinguished
first
Secured exposure of 100
partially secured: 50 by collateral
(after haircut), 30 by financial
(iii)
0
100
50
30
0
guarantee (after haircut), none
by credit derivatives
One unsecured loan of 20 and
one secured loan of 80. The
secured loan is overcollateralised: 60 by collateral
(after haircut), 90 by guarantee
(iv)
20
80
60
20
0
(after haircut), none by credit
derivatives. If bank expects that
collateral would be extinguished
first.
One unsecured loan of 20 and
one secured loan of 80. The
secured loan is undercollaterised: 50 by collateral
(v)
20
80
50
20
0
(after haircut), 20 by guarantee
(after haircut), none by credit
derivatives.
Definitions:
Exposures to be secured: carrying amount of exposures which have at least one credit risk mitigation mechanism (collateral,
financial guarantees, credit derivatives) associated with them. The allocation of the carrying amount of multi-secured
exposures to their different credit risk mitigation mechanisms is made by order of priority, starting with the credit risk
mitigation mechanism expected to be called first in the event of loss, and within the limits of the carrying amount of the
secured exposures.
Exposures secured by collateral: carrying amount of exposures (net of allowances/impairments) partly or totally secured by
collateral. In case an exposure is secured by collateral and other credit risk mitigation mechanism(s), the carrying amount of
the exposures secured by collateral is the remaining share of the exposure secured by collateral after consideration of the
shares of the exposure already secured by other mitigation mechanisms expected to be called beforehand in the event of a
loss, without considering overcollateralisation.
Exposures secured by financial guarantees: carrying amount of exposures (net of allowances/impairments) partly or totally
secured by financial guarantees. In case an exposure is secured by financial guarantees and other credit risk mitigation
Frequently asked questions on the revised Pillar 3 requirements
7
mechanism, the carrying amount of the exposure secured by financial guarantees is the remaining share of the exposure
secured by financial guarantees after consideration of the shares of the exposure already secured by other mitigation
mechanisms expected to be called beforehand in the event of a loss, without considering overcollateralisation.
Exposures secured by credit derivatives: carrying amount of exposures (net of allowances/impairments) partly or totally
secured by credit derivatives. In case an exposure is secured by credit derivatives and other credit risk mitigation
mechanism(s), the carrying amount of the exposure secured by credit derivatives is the remaining share of the exposure
secured by credit derivatives after consideration of the shares of the exposure already secured by other mitigation
mechanisms expected to be called beforehand in the event of a loss, without considering overcollateralisation.
Question 16: What are the values to be ascribed to collateral, guarantees and credit default swaps?
Answer: Banks should disclose the amount of credit risk mitigation calculated according to the
regulatory framework, including both the costs to sell and of haircut.
Template CR5: Standardised Approach – exposures by asset classes and risk weights
Question 17: Where should exposures to central counterparties (CCPs) be included?
Answer: Exposures for trades, initial margins and default fund contributions are included in Template
CCR8. Exposures stemming from loans to CCPs excluding initial margins and default fund contributions
should be included within the credit risk framework considering the CCP as an asset class item. These
loans should be included in the exposure class where the national implementation of the Basel
framework allows exposures to CCPs to be included.
Template CRE – Qualitative disclosures related to IRB models
Question 18: What is meant by “scope of the supervisor’s acceptance of approach” under row (d)?
Answer: The “scope of the supervisor’s acceptance of approach” refers to the scope of internal models
approved by the supervisors in terms of entities within the group (if applicable), portfolios and exposure
classes, with a breakdown between F-IRB and A-IRB, if applicable.
Template CR7: IRB – Effect on RWA of credit derivatives used as CRM techniques
Question 19: What is the required disclosure if an exposure is only partially hedged by a credit
derivative? For instance, consider a loan with nominal exposure of $100, risk weight of 150% and
therefore RWA of $150. The bank buys a CDS with a $30 nominal amount, and the risk weight of the
protection provider is 50%. Which values should be entered in columns (a) and (b)?
Answer: Under the IRB approach, credit derivatives are recognised as credit risk mitigation (CRM)
techniques for the F-IRB and A-IRB. In both cases, banks can reflect the risk mitigating effect of credit
derivatives on an exposure by adjusting their probability of default (PD) or loss-given-default (LGD).
Banks should disclose in Template CR7:
•
in column (a): the RWA of an exposure secured by a credit derivative calculated without
reflecting the risk mitigating effect of credit derivatives (in the example, banks would disclose
$150); and
•
in column (b): the RWA of the same exposure calculated reflecting the risk mitigating effect of
credit derivatives (in the example, banks would disclose 30*50% + 70*150% = 120).
8
Frequently asked questions for revised Pillar 3 framework
Template CR9: IRB – Backtesting of probability of default per portfolio
Question 20: Is the “weighted average PD” in column (d) to be calculated based on the formula below?
Answer: “Weighted” means EAD-weighted. For this purpose, the formula above is correct since the data
will be comparable to those reported in column (i).
Question 21: Which are the models referred to within the “scope of application”: the borrower risk
rating model (to generate risk rating for each obligor in the portfolio) or the PD estimation model (to
calibrate PD for each risk rating level)?
Answer: The models to be disclosed refer to any model, or combination of models, approved by the
supervisor, for the generation of the PD used for calculating capital requirements under the IRB
approach. This may include the model that is used to assign a risk rating to an obligor, and/or the model
that calibrates the internal ratings to the PD scale.
Question 22: For column (c), how should “external rating equivalent” be interpreted in the context of the
retail portfolio?
Answer: “External rating equivalent” refers to external ratings that may, in some jurisdictions, be
available for retail borrowers. This may, for instance, be the case for small and medium-sized enterprises
(SMEs) that fit the requirements to be included in the retail portfolios which in some jurisdictions could
have an external rating, or a credit score or a range of credit scores provided by a consumer credit
bureau. However, where such external ratings are not available, they need not be provided.
Question 23: For column (d) (weighted average PD), are these estimated or actual PDs? Should these
figures be weighted by estimated exposure?
Answer: These are the estimated PDs assigned by the internal model authorised under the IRB
approaches. The PD values are EAD-weighted and the “weight” is the EAD at the beginning of the
period.
Question 24: For column (e) (arithmetic average PD by obligors), is this a simple average or weighted by
obligors?
Answer: In column (e), the average PD by obligors is the simple average. Arithmetic average PD = sum
of PDs of all accounts (transactions) / number of accounts.
Question 25: How should “defaulted obligors” be defined, for the purpose of the disclosure template?
For column (f) (number of obligors), please clarify how “obligors” are defined from a retail perspective.
Should “end of the previous year” include only non-defaulted accounts at the beginning of the year, or
both defaulted and non-defaulted accounts? Should “end of the year” include all active accounts at the
end of the year?
For column (g) (defaulted obligors in the year), please clarify whether it is related to accounts that
defaulted during the year or from inception.
Frequently asked questions on the revised Pillar 3 requirements
9
Answer: The definition of obligors or retail obligors is the same as for other obligors; any individual
person or persons, or an SME. Furthermore, where banks apply the “transaction approach”, each
transaction shall be considered as a single obligor. A defaulted obligor is an obligor that meets the
conditions set out in paragraphs 452–459 in the Basel framework.
For column (f), the “end of the previous year” includes non-defaulted accounts at the beginning of the
year of reference for disclosure. The “end of the year” includes all the non-defaulted accounts related to
obligors already included in the “end of the previous year” plus all the new obligors acquired during the
year of reference for disclosure which did not go into default during the year. 5
For column (g), “defaulted obligors” includes: (i) obligors not in default at the beginning of the year who
went into default during the year; and (ii) new obligors acquired during the year– through origination or
purchase of loans, debt securities or off-balance sheet commitments – that were not in default, but
which went into default during the year. Obligors under (ii) are also separately disclosed in column (h).
The PD or PD range to be included in columns (d) and (e) is the one assigned at the beginning of the
period for obligors that are not in default at the beginning of the period.
Question 26: Is the average historical annual default rate to be disclosed in column (i) before the margin
of conservatism?
Answer: Yes, it is before the margin of conservatism.
Question 27: What considerations can institutions reference when disclosing a model performance test
(backtesting) when the test is not aligned to the year-end disclosure timetable?
Answer: The frequency of the disclosure is not linked to the timing of the bank’s backtesting. The annual
disclosure frequency does not require a timetable of model backtesting that is calibrated on a calendar
year basis. When the backtesting reference period is not calibrated on a calendar year basis, but on
another time interval (for instance, a 12-month interval), “year” as used in columns (f), (g) and (h) means
“over the period used for the backtesting of a model”. Banks must, however, disclose the time horizon
(observation period/timetable) they use for their backtesting.
Counterparty credit risk
Template CCR5 – Composition of collateral for CCR exposure
Question 28: Under columns (e) and (f), how should the term “collateral” be interpreted with regard to
securities financing transactions (SFTs)?
Interpretation 1: Collateral used is defined as referring to one leg of the transaction only. Example: a
bank transfers securities to a third party, which in turn posts collateral to the bank. The bank would
report only collateral received in column (e).
5
10
Banks have discretion as to whether to include obligors who left during the year within the “end of the year” number.
Frequently asked questions for revised Pillar 3 framework
Interpretation 2: Collateral used is defined as referring to both legs of the transaction. Example: a bank
transfers securities to a third party, which in turn posts collateral to the bank. The bank reports both legs
of the transaction in Template CCR5. The collateral received is reported in column (e), while the collateral
posted by the bank is reported in column (f).
Answer: Interpretation 2 applies, and “collateral” refers to both legs of the transaction.
The case below illustrates the cash and security legs of two securities lending transactions in Template
CCR5:
•
Repo on foreign sovereign debt with $50 cash received and $55 collateral posted
Reverse repo on domestic sovereign debt with $80 cash paid and $90 collateral received
•
e
f
Collateral used in SFTs
Fair value of collateral received
Cash – domestic currency
Fair value of posted collateral
80
Cash – other currencies
50
Domestic sovereign debt
90
Other sovereign debt
55
…
Total
140
135
Question 29: The “purpose” of the template asks for a breakdown of all types of collateral posted or
received. The content section, however, asks for collateral used. These numbers differ as certain
transactions are over-collateralised (ie >100% of exposure) and therefore not all collateral would be used
for risk mitigation. Should the template include all collateral posted/received or just collateral that is
applied?
Answer: The numbers reported in Template CCR5 should be the total collateral posted/received (ie not
limited to the collateral that is applied/used for risk mitigation). The purpose of the template is to
provide a view on the collateral posted/received rather than the value accounted for within the
regulatory computation. If the bank wishes to disclose the collateral eligible for credit mitigation, it may
do so using an accompanying narrative.
Question 30: Does “domestic currency” refer to the transaction currency or the bank’s reporting
currency?
Answer: When exposure classes use “domestic currency”, these refer to items of collateral that are
denominated in the bank’s (consolidated) reporting currency and not the transaction currency.
Question 31: In the case of disclosures on a consolidated basis, does “domestic sovereign debt” refer to
sovereign debt of the jurisdiction where the parent company of the bank is incorporated, regardless of
the currency of denomination?
Answer: “Domestic sovereign debt” refers to the sovereign debt of the jurisdiction of incorporation of
the bank, or, when disclosures are made on a consolidated basis, the jurisdiction of incorporation of the
parent company.
Frequently asked questions on the revised Pillar 3 requirements
11
Question 32: For the fair value of collateral received or posted, is it before or after any haircut?
Answer: For disclosure purposes, the fair value of collateral received or posted must be after any haircut.
This means the value of collateral received will be reduced by the haircut (ie C(1 – Hs)) and collateral
posted will be increased after the haircut (ie E(1 + Hs)).
Template CCR7 – RWA flow statements of CCR exposures under the Internal Model
Method (IMM)
Question 33: Template CCR7 refers to an RWA flow on IMM exposures. Row 4 (Model updates – IMM
only) and row 5 (Methodology and policy – IMM only) are specifically to include only model and
methodology/policy changes relating to the IMM exposures model. Where in the template would
changes to the IRB models that result in changes in risk weights for positions under the IMM be
reported?
Answer: Template CCR7 is consistent with Template OV1, which requests a split by EAD methodology
and not by risk weighting methodology. Banks are recommended to add rows to report any changes
relating to risk weighting methodology if they deem them useful. The row breakdown is flexible and
intends to depict all the significant drivers of changes for the RWA under counterparty credit risk.
Specific rows should be inserted when changes to the IRB model result in changes to the RWA of
instruments under counterparty credit risk whose exposure value is determined based on the IMM.
Template CCR8 – Exposures to central counterparties
Question 34: Given that the new CCP rules are applicable from 1 January 2017, should the first
disclosure date be 30 June 2017 or 31 December 2017?
Answer: The frequency is semiannual, with first disclosure based on the exposures as at 30 June 2017.
Question 35: Is it necessary to fill in row 10, “unfunded default fund contributions”? For instance, when a
bank is not a clearing member but a client of the clearing member, is it necessary to post exposures to
the clearing member in this template?
Answer: When a bank is not a clearing member but a client of a clearing member, it should include its
exposures to unfunded default fund contributions if applicable. Otherwise, banks should leave this row
empty and explain the reason in the accompanying narrative.
Securitisation
Template SEC1: Securitisation exposures in the banking book
Question 36: Template SEC1 requires the disclosure of “carrying values”. Is there a direct link between
columns (c), (g) and (k) of Template SEC1 and column (e) of Template LI1?
Answer: Reconciliation is not possible when Template SEC1 presents securitisation exposures within and
outside the securitisation framework together. However, when banks choose to disclose Template SEC 1
and SEC 2 separately for securitisation exposures within the securitisation framework and outside that
framework, the following reconciliation is possible: the sum of on-balance sheet assets and liabilities
included in columns (c), (g) and (k) of Template SEC1 is equal to the amounts disclosed in column (e) of
Template LI1.
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Frequently asked questions for revised Pillar 3 framework
Template SEC3: Securitisation exposures in the banking book and associated regulatory
capital requirements – bank acting as originator or as sponsor
Template SEC4: Securitisation exposures in the banking book and associated capital
requirements – bank acting as investor
Question 37: Should institutions disclose RWA before or after the application of the cap?
Answer: RWA figures disclosed in Templates SEC3 and SEC4 should be before application of the cap, as
it is useful for users to compare exposures and RWA before application of the cap. Columns (a)–(m) in
Templates SEC3 and SEC4 should be reported prior to application of the cap, while columns (n)–(q)
should be reported after application of the cap. RWA after application of the cap are disclosed in
Template OV1.
Question 38: When bank investors complete Template SEC4, do they have to take into account whether
the originator of a securitisation transaction complies with the significant risk transfer criteria?
Answer: No, Template SEC 4 should include all investor securitisation positions that are treated under
the securitisation framework, regardless of whether any originator or sponsor complies with the
significant risk transfer criteria.
Market risk
Template MRA: Qualitative disclosure requirements related to market risk
Question 39: Under the revised Pillar 3 disclosure requirements, banks must describe the “scope and
nature of risk reporting and/or measurement systems” as one of their objectives and policies for market
risk management frameworks. What is the disclosure required?
Answer: Banks should include descriptions relating to positions covered by the approach and the
underlying trading activities that impact each type of market risk factor (eg interest rate risk factors,
equity risk factors, foreign exchange risk factors, commodity risk factors). These may include:
(a)
their risk analysis and risk management systems;
(b)
how (a) corresponds to the nature and volume of transactions;
(c)
how reporting and measurement systems provide an overall understanding of all the risks
associated with the bank’s market activities, including, at least on a day-to-day basis, the risks
resulting from trading book positions;
(d)
a description of the organisational and internal control procedures;
(e)
the communication mechanisms between the different parties involved in risk management
(management body, senior management, business lines and central risk management function);
and
(f)
the frequency of reporting and the process set up to regularly update and assess the reporting
and measurement systems.
Frequently asked questions on the revised Pillar 3 requirements
13
Template MRB: Qualitative disclosures for banks using the Internal Models Approach
Question 40: What is the intended relationship between the stressed value-at-risk (SVaR) and the stress
testing under Section B, for item (g) (Description of stress testing applied to the modelling parameters)?
Answer: The requirement in Section B, item (g) applies to VaR and SVaR models. Banks should describe
the main scenarios that they have developed to capture the characteristics of the portfolios to which the
VaR and SVaR models apply at the group-wide level, including the methodology for the selection of the
stress period.
Question 41: Regarding Section C, item (d) (Approach used in the validation of the models), is the
approach to be covered for every model or only for when a model is updated during the reporting
period?
Answer: A general description of the process developed to ensure that the internal models have been
adequately validated by suitable parties (ie independent and qualified to ensure that the models are
conceptually sound and capture all material risks, including specific criteria related to incremental default
and migration risk) should be provided in each annual Pillar 3 report. Banks should also explain how the
validation process is implemented, when the models are initially developed as well as when any
significant changes are made to the models, and how they ensure a periodic validation to capture any
significant structural changes in the market or in the composition of the portfolios covered by the
models.
Question 42: According to the description of the scope of application under the revised Pillar 3
disclosure requirements, “the commentary must include the percentage of capital requirements covered
by the models described for each of the regulatory models (VaR, stressed VaR, IRC, Comprehensive Risk
Measure).” Given that the breakdown of capital charges due to each of the components is disclosed
under Template MR2, is the qualitative disclosure still required?
Answer: The purpose of this percentage is to inform how representative the internal models used within
the group that are described in the qualitative part for VaR/SVaR/IRC/CRM are, relative to the main
models used within the group. This would not be relevant if only one model was used for all the entities
included in the consolidated group for each internal model of VaR/SVaR/IRC/CRM. For instance, for
disclosure requirements in Template MRB, if within a banking group of six entities, five consolidated
banking entities use an “X” VaR model representing 90% of the total capital charge calculated based on
the VaR model of the consolidated banking group, and one entity uses a “Y” VaR model (different from
the “X” model), the banking group should specify that the description of the qualitative characteristics of
the internal VaR model represents 90% of the capital charge calculated based on the VaR model of the
banking group, to give users an indication of how representative the model described is.
Template MR2: RWA flow statements of market risk exposures under an IMA
Question 43: Does “foreign exchange” refer to foreign exchange translation movements?
Answer: This row is intended to capture changes in RWA under the market risk internal models
approach arising from foreign currency translation movements.
Question 44: For Internal Models Approach (IMA) banks, the market risk capital charge is the maximum
of (i) quarter-end figures; and (ii) average figures of the last 60 days, with the multiplier applicable to
those banks. Given that row 1 states “at previous quarter-end” and row 8 states “at the end of reporting
14
Frequently asked questions for revised Pillar 3 framework
period”, does the template require flow analysis based upon quarter-end figures (ie the amount
presented in the rows in this template do not necessarily match the actual market risk capital charge
under the Pillar 1 requirement)?
Answer: As specified in the definitions: “Total RWA at end of reporting period: derived risk-weighted
assets corresponding to the [total capital requirements for market risk on the basis of internal model
approaches * 12.5]”; this amount must reconcile with the amounts shown in Template OV1. Therefore,
row 1 must reflect “the end of previous reporting period”, and the rows in this template must match the
actual market risk charge under the Pillar 1 requirement.
As the linkage in Template OV1 states that “OV1: Amount in OV1:18/a, is equal to [MR2:8/f]”, the
amount in OV1:18/b is equal to [MR2:1/f].
If the derived RWA from the capital requirement for any of the columns (a)–(d) / rows 1 or 8, is not
directly provided by the model, but is instead calculated from the 60-day average (for VaR and SVaR),
the 12-week average measure or the floor measure (for CRM), the bank may add an additional row for
regulatory adjustment (as presented below) in order to be able to provide the reconciliation required in
Template MR2 as well as the key drivers’ amounts in rows 2–6.
1
a
b
c
d
e
f
VaR
Stressed
VaR
IRC
CRM
Other
Total
RWA
RWA at previous quarter-end
a
Regulatory adjustment
b
RWA at previous quarter-end (end of day)
2
Movement in risk levels
3
Model updates/changes
4
Methodology and policy
5
Acquisitions and disposals
6
Foreign exchange movements
7
Other
8a
RWA at end of reporting period (end of day)
8b
Regulatory adjustment
8c
RWA at end of reporting period
Example for illustration
For instance, for VaR extra rows would be inserted for the use of 60-day average models in each of the
illustrative cases outlined above, with additional narrative to explain row 1b and 8b:
Frequently asked questions on the revised Pillar 3 requirements
15
a
VaR
Case 1
1
RWA at previous quarter-end
60-day average
a
Regulatory adjustment
∆ 60-day
average/end of
period
b
2
3
4
5
6
7
RWA at previous quarter-end (end
of day)
Movement in risk levels
Model updates/changes
Methodology and policy
Acquisitions and disposals
Foreign exchange movement
Others
8a
RWA at end of reporting period (end of
day)
8b
Regulatory adjustment
8c
RWA at end of reporting period
b
VaR
Case 2
End-of-day
value
60-day average
d
VaR
Case 4
End-of-day
value
∆ 60-day
average/end of
period
End-of-day
value
End-of-day value
End-of-day
value
∆ 60-day
average/end of
period
60-day average
c
VaR
Case 3
End-of-day
value
∆ 60-day
average/end of
period
60-day average
End-of-day
value
End-of-day
value
Template MR4: Comparison of VaR estimates with gains/losses
Question 45: Is the disclosure necessary? It could reveal sensitive information such as capital multipliers.
Answer: The daily VaR measures in the template are to be reported before additional capital charges at
the supervisor’s discretion, but Template MR4 should show the number and the extent of the
backtesting exceptions, with an analysis of the main outliers. Template MR4 provides backtesting
information on the daily regulatory VaR calibrated to a one-day holding period to compare with the 99%
confidence level with its trading outcome. To the extent that the template is intended to provide
information on the reliability of the VaR estimates in highlighting the frequency and the extent of the
outliers in the backtesting results, the daily VaR value is the same as that disclosed in Template MR3,
meaning that it does not include additional capital charges at the supervisor’s discretion. The narrative
information should provide information on the number and the extent of the backtesting exceptions.
Question 46: Both hypothetical and actual backtesting results are requested, but are actual results
needed if they are not reported to regulators?
Answer: Except when national supervisors have explicitly limited the backtesting to one of these two
approaches, banks must present a meaningful comparison of the daily VaR measures on trading
outcomes for actual and hypothetical changes in the corresponding portfolio’s value.
Question 47: The accompanying narrative to the disclosure template states: “Banks must disclose similar
comparisons for actual P&L and hypothetical P&L (developed in accordance with paragraphs 18 to 20 of
Annex 10a part II of the Basel framework).” What does “similar comparisons” mean?
Answer: For the key models used at the group-wide level, banks must disclose a comparison between
the daily VaR measures and the trading outcomes corresponding to hypothetical changes in the
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Frequently asked questions for revised Pillar 3 framework
portfolio’s values (based on a comparison between the portfolio’s end-of-day value and, assuming
unchanged positions, its value at the end of the subsequent day), as well as a comparison between the
daily VaR measure and the trading outcomes corresponding to actual changes in the portfolio’s values
(based on a comparison between the portfolio’s end-of-day value and its actual value at the end of the
subsequent day).
As instructed in Template MR4, daily VaR should reflect the risk measures (used for regulatory
purposes) calibrated to a one-day holding period to compare with the 99% confidence level with its
trading outcomes for both actual and hypothetical P&L.
Frequently asked questions on the revised Pillar 3 requirements
17